The Fed Will Stop Any Extra Economic Growth

Dean BakerI’ve already written an overview about all this nonsense, Trump’s Huge Tax Cut for the Rich — of Course. It turns out that Trump’s tax plan is just a bigger version of Jeb Bush’s. And Marco Rubio’s. Basically, Trump’s tax plan is just another Republican tax cut for the rich. And look: Grover Norquist Blesses Trump Tax Plan. I had read somewhere that Norquist had seen the plan before it was announced, and that he had given his blessing then. So there is nothing surprising in any of this. Donald Trump is just another Republican loud mouth with absolutely nothing to offer.

But Dean Baker wrote a really insightful article on Tuesday, Trump World and the Fed. He focused on one aspect of the plan: the supply side voodoo. When Jeb Bush announced his plan, he claimed that it was going to increase economic growth to a 4% rate. No economists took that number seriously. Even the conservative economists who Bush has on the payroll distanced themselves from that. We haven’t seen much over 3% since the 1960s. But since Trump has to do everything bigger, he said his tax cuts would produce 6% growth. And why not? If Jeb Bush can get away with pulling a number out of the air, why can’t they all?

Baker’s point is that the Federal Reserve would never allow that kind of growth. As it is, we have anemic growth, low employment-to-population rate, and no real wage growth, and the Fed is just itching to raise interest rates.

Baker’s point is that the Federal Reserve would never allow that kind of growth. As it is, we have anemic growth, low employment-to-population rate, and no real wage growth — and the Fed is just itching to raise interest rates. Baker noted, “In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. Higher interest rates would slow house buying and new construction, discourage car sales, and put a crimp in both public and private investment.” And that, of course, is assuming that Trump’s plan worked as he claims (which of course it wouldn’t).

There is a broader point here. The Fed now sees its job as making sure that millions of Americans are involuntarily unemployed and that all Americans are stuck with stagnant wages. That’s not how they would put it, of course. They would say they are heading off inflation — despite the fact that they haven’t manage to even meet their 2% inflation target since the financial crisis. But regardless of their reasons, they point remains that whatever the economic policy, the Fed is determined to stop it if it actually works.

The last two economic booms were due to the Federal Reserve. The Fed destroyed the economy in the late 1970s to head off what was actually high inflation. And then when it lowered rates, it brought on the boom of the 1980s, which people wrongly give Reagan credit for. And then in the 1990s, Clinton’s economic policies were mostly fine, but it was only because Alan Greenspan was an iconoclast and allowed unemployment to get below 4% that the boom happened. It’s interesting to note that one of the big dissenting voices at that time — calling for him to raise interest rates — was current Fed Chair Janet Yellen. (Did you hear that Yellen just announced that the Fed will, in fact, raise rates by the end of the year? Way to go! Keep the rich happy! Screw the poor!)

So we are in this situation where we need two things to happen if the economy is really to start working for all Americans in the usual liberal, market oriented, way. First, we need good (or lucky) economic policy. Second, we need the Fed to allow it. So we have to break through two plutocratic barriers. This is why I am more and more convinced that we have to give up on the capitalist system as we now find it. It is self-corrupting. The more money people have, the more influence they buy. That isn’t the only problem with capitalism, but it is one of the biggest we now face. And it is one with no solution.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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